Monday, November 6, 2017

Hedge Funds Push the Price of Bitcoin to New Highs

By NATHANIEL POPPER
A walk-in cryptocurrency exchange in Seoul, South Korea. While such exchanges cater to a growing interest among small investors, many hedge funds, too, are looking to capitalize on surging prices in virtual currencies like Bitcoin. Jean Chung for The New York Times
SAN FRANCISCO — The chief executive of JPMorgan Chase, Jamie Dimon, has called Bitcoin a fraud and made it clear that he will not allow his bank to begin trading the virtual currency any time soon.
But that has not stopped a growing wave of big Wall Street investors — many of them hedge funds — from pouring their money into Bitcoin, helping extend an eight-month spike in its price.
The price of a single Bitcoin climbed from below $6,000 two weeks ago to above $7,400 on Monday, more than it moved in the virtual currency’s first seven years in existence.
Since the beginning of the year, the value of Bitcoin has jumped over 600 percent, putting the combined value of all Bitcoin at about $120 billion, or more than many of the largest banks in the world.
The rise has been fueled by several factors, including the sudden interest in virtual currencies from small investors in Japan and South Korea.
Now market watchers say a significant amount of the new money is coming from large institutional investors, many of them hedge funds looking to capitalize on the skyrocketing price.
Many of the hedge funds were set up over the last year to invest exclusively in virtual currencies. The research firm Autonomous Next has said the number of such hedge funds has risen from around 30 to nearly 130 this year alone.
More general-purpose hedge funds have also been buying up Bitcoin, like one run by Bill Miller, a well known mutual fund manager who spent most of his career with Legg Mason.
Even more big investors are looking at the space after the Chicago Mercantile Exchange announced last week that it would launch a Bitcoin futures contract in the next few months. The contract will make it easier for financial institutions plugged into the exchange to get involved with the Bitcoin market without having to worry about holding Bitcoin itself.
Bobby Cho, the head trader at one of the largest Bitcoin trading businesses, Cumberland, said that after years of hesitancy, institutional investors now accounted for most of his business.
“The vast majority of the trading we do is with institutions,” Mr. Cho said. “The education and research have turned into real-life activity.”

The New York Times Explains...

The entrance of these big investors creates new risks for Bitcoin.
Kevin Zhou, a longtime trader in the space, said that hedge funds were more likely than small investors to pull out a lot of money at once, and that Bitcoin was still small enough that a single fund’s cashing out could cause the price to drop sharply.
“You could get a possible run on the bank if one large investor withdraws and that causes the price to tank,” said Mr. Zhou, a co-founder of the trading firm Galois Capital. “That could cause a cascade of withdrawals.”
The rising importance of Wall Street is an unexpected turn for a virtual currency that was invented in 2008 by an anonymous creator known as Satoshi Nakamoto and designed to operate outside the traditional financial system.

The Soaring Price of Bitcoin

Since the beginning of the year, the value of Bitcoin has jumped over 600 percent.
$6,000
4,000
2,000
0
$7,377
2017
April
July
Oct.
(11/5)
Source: Blockchain.info | By The New York Times
Bitcoins, even those held by hedge funds, are recorded and stored on a decentralized database known as the blockchain, kept on a network of computers around the world. The whole system is governed by so-called open source software that is maintained by a community of volunteer programmers.
The lack of backing from any government or established institution has concerned many large banks. The chief executive of Credit Suisse, Tidjane Thiam, said last week that he saw no inherent value in Bitcoin, joining the list of bankers who have called the market a bubble.
But some financial leaders, including Goldman Sachs’s chief executive, Lloyd Blankfein, and Christine Lagarde, the head of the International Monetary Fund, have defended the idea that virtual currencies could one day play a role in the global financial system because they can be obtained by anyone with internet access.
The debate about Bitcoin has been part of a broader explosion of interest this year in the various technological concepts introduced by the virtual currency. Many banks, including JPMorgan, have been trying to find ways to create their own decentralized databases, like the Bitcoin blockchain, that could provide a more reliable and secure way to track information.
In the technology industry, there has been a rush this year of so-called initial coin offerings, a way for entrepreneurs to raise money by creating and selling their own custom virtual currencies. Initial coin offerings have taken over $3 billion from investors this year after attracting almost no interest before.
These coin offerings have created their own demand for Bitcoin because the new coins generally have to be bought with an existing virtual currency like Bitcoin.
The interest in Bitcoin could be dampened in the coming weeks, however, by a debate among Bitcoin followers.
Bitcoin start-ups and programmers have been fighting for nearly three years about the best way to update the software that governs the currency and the network on which it lives.
The battle is expected to come to a head this month when new Bitcoin software, backed by many of the biggest virtual currency start-ups, is released. The new software aims to double the number of transactions flowing through the network. Currently, the computers processing Bitcoin transactions are limited to about five transactions per second.
Most of the programmers who maintain the Bitcoin software have opposed the changes because they say it would make it harder for individuals to track their own Bitcoins.
Some of the computers on the network are likely to update to the new software while others stay with the existing rules, creating a split, or fork, in the network that would result in two separate Bitcoins.
A Bitcoin fork could prove disruptive and drive away investors. But several signals suggest that the proposed rule changes are not likely to win enough support to survive for long, which would leave the status quo in place.
Bitcoin has already survived past attempts to fork the software and create imitators. In August, a group of former Bitcoin supporters created Bitcoin Cash, a totally separate virtual currency that makes it easier to do small transactions, like paying for a cup of coffee.
The price of Bitcoin temporarily wavered before Bitcoin Cash was introduced. All previous holders of Bitcoin were automatically granted the same number of Bitcoin Cash, and the value of those has also been rising, essentially doubling in the last month.
Chris Burniske, a co-author of a book on virtual currency investing, “Cryptoassets,” said most of the new investors weren’t too concerned about the exact design of Bitcoin or the current debates.
“I don’t think a lot of the new buyers are overly concerned about the long-term technical aspects of Bitcoin,” he said. They are “simply approaching it as a financial instrument.”
Follow Nathaniel Popper on Twitter: @nathanielpopper.
A version of this article appears in print on November 7, 2017, on Page B3 of the New York edition with the headline: Price of Bitcoin Surges, Lifted by Hedge Funds. Order Reprints| Today's Paper|Subscribe

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Saturday, November 4, 2017

Floods!

A Broke, and Broken,
Flood Insurance Program

Now, an unusual coalition of insurers, environmentalists
and fiscal conservatives is seeking major changes
in the federal plan as a deadline approaches.
By MARY WILLIAMS WALSH
In August, when Hurricane Harvey was bearing down on Texas, David Clutter was in court, trying one more time to make his insurer pay his flood claim — from Hurricane Sandy, five years before.
Mr. Clutter’s insurer is the federal government. As it resists his claims, he has been forced to take out a third mortgage on his house in Long Beach, N.Y., to pay for repairs to make it habitable for his wife and three children. He owes more than the house is worth, and his flood-insurance premiums just went up.
The government-run National Flood Insurance Program is, for now, virtually the only source of flood insurance for more than five million households in the United States. This hurricane season, as tens of thousands of Americans seek compensation for storm-inflicted water damage, they face a problem: The flood insurance program is broke and broken.
The program, administered by the Federal Emergency Management Agency, has been in the red since Hurricane Katrina flooded New Orleans in 2005. It still has more than a thousand disputed claims left over from Sandy. And in October, it exhausted its $30 billion borrowing capacity and had to get a bailout just to keep paying current claims.
Temporary sidewalks in Greenville, Miss., during a 1927 flood. The extent of the destruction prompted home insurers to stop writing flood coverage. Getty Images
Congress must decide by Dec. 8 whether to keep the program going. An unusual coalition of insurers, environmentalists and fiscal conservatives has joined the Trump administration in calling for fundamental changes in the program, including direct competition from private insurers. The fiscal conservatives note that the program was supposed to take the burden off taxpayers but has not, and environmentalists argue that it has become an enabler of construction on flood-prone coastlines, by charging premiums too low to reflect the true cost of building there.
The program has other troubles as well. It cannot force vulnerable households to buy insurance, even though they are required by law to have it. Its flood maps can’t keep up with new construction that can change an area’s flood risk. It has spent billions of dollars repairing houses that just flood again. Its records, for instance, show that a house in Spring, Tex., has been repaired 19 times, for a total of $912,732 — even though it is worth only $42,024.
And after really big floods, the program must rely on armies of subcontractors to determine payments, baffling and infuriating policyholders, like Mr. Clutter, who cannot figure out who is opposing their claims, or why.
Roy E. Wright, who has directed the flood insurance program for FEMA since June 2015, acknowledged in an interview on Friday that major changes were called for and said some were already in the works. The program’s rate-setting methods, for example, are 30 years old, he said, and new ones will be phased in over the next two years. But other changes — like cutting off coverage to homes that are repeatedly flooded — would require an act of Congress.
“The administration feels very strongly that there needs to be reform this year,” he said. “I believe strongly that we need to expand flood coverage in the United States, and the private insurers are part of that.”
The federal program was created to fill a void left after the Great Mississippi Flood of 1927, when multiple levees failed, swamping an area bigger than West Virginia and leaving hundreds of thousands homeless. Insurers, terrified of the never-ending claims they might have to pay, started to exclude flooding from homeowners’ insurance policies. For decades, your only hope if your home was damaged in a flood was disaster relief from the government.
Policymakers thought an insurance program would be better than ad hoc bailouts. If crafted properly, it would make developers and homeowners pay for the risks they took.
When Congress established the National Flood Insurance Program in 1968, it hoped to revive the private flood-insurance market. Initially about 130 insurers gave it a shot, pooling their capital with the government. But there were clashes, and eventually the government drove out the insurers and took over most operations.
Since 1983, Washington has set the insurance rates, mapped the floodplains, written the rules and borne all of the risk. The role of private insurers has been confined to marketing policies and processing claims, as government contractors.
That worked for a few decades. But now, relentless coastal development and the increasing frequency of megastorms and billion-dollar floods have changed the calculus.

Unable to Keep Up With the Floods

The National Flood Insurance Program has been in the red since 2005, when Hurricane Katrina flooded New Orleans and it suddenly had to pay out $16.3 billion in claims.
billion
$16
National Flood
Insurance Program:
14
Hurricanes Harvey,
Irma and Maria
Total premiums collected
12
Hurricane
Katrina
Flood loss claims paid
10
8
Hurricane
Sandy
6
4
2
0
’78
’80
’85
’90
’95
’00
’05
’12
’17
By The New York Times | Source: Federal Emergency Management Agency. Note: Paid flood loss claims for 2017 are estimated.
“Put plainly, the N.F.I.P. is not designed to handle catastrophic losses like those caused by Harvey, Irma and Maria,” Mick Mulvaney, the director of the White House Office of Management and Budget, said in a letter to members of Congress after the three huge hurricanes barreled into the United States this season.
Mr. Mulvaney called on Congress to forgive $16 billion of the program’s debt, which both houses agreed to do.
The program, however, needs more than a financial lifeline: Without major, long-term changes, it will just burn through the $16 billion in savings and be back for more.
The White House is hoping to lure companies back into the market, letting them try to turn a profit on underwriting flood policies instead of simply processing claims for the government.
One measure proposed by the Trump administration is for the government to stop writing coverage on newly built houses on floodplains, starting in 2021. New construction there is supposed to be flood-resistant, and if the government retreats, private insurers may step in. Or so the theory goes.
“The private market is anxious, willing and completely able to take everything except the severe repetitive-loss properties,” said Craig Poulton, chief executive of Poulton Associates, which underwrites American risks for Lloyd’s of London, the big international insurance marketplace.
“Severe repetitive-loss properties” is FEMA’s term for houses that are flooded again and again. There are tens of thousands of them. While they account for fewer than 1 percent of the government’s policies, they make up more than 10 percent of the insurance claims, according to the Natural Resources Defense Council, which sued FEMA to get the data.
The Trump administration has also proposed creating a new category of properties that are at extreme risk of repeat flooding and that could have their insurance cut off the next time they flooded.
That might sound harsh. Environmental groups, though, argue it’s worse to repeatedly repair doomed houses on flood-prone sites as oceans warm and sea levels rise. The Natural Resources Defense Council argues that the flood-insurance program should buy such properties so the owners can move somewhere safer.
The program, however, has only limited authority to make such purchases; homeowners need to line up funding through other government agencies. As a result, such buyouts are rare.
“I have mounds and mounds of paper, and I’m still waiting,” said Olga McKissic of Louisville, Ky., who applied for a buyout in 2015 after her house flooded for the fifth time. “I want them to tear it down.”
Ms. McKissic even had her house classified as a severe repetitive-loss property, thinking FEMA would give it higher priority. But FEMA has not responded to her application. Instead, it doubled her premiums.
The Nottingham Forest section of Houston is not on a designated floodplain, so residents were not told to buy flood insurance. But it flooded during Hurricane Harvey when officials released water from overloaded reservoirs. Daniel Borris for The New York Times
Streets in the Santurce section of San Juan, P.R., remained flooded a week after Hurricane Maria struck the island in September. Victor J. Blue for The New York Times
That’s what happens when there’s a monopoly, said Mr. Poulton, the Lloyd’s underwriter.
Over the years, he said, he has noticed that his customers are buying Lloyd’s earthquake insurance because it includes flood coverage. They do not like the government’s flood insurance because payouts are capped at $250,000 and have other limits.
Such as basements.
Matt Herr of Superior Flood in Brighton, Colo., another underwriter for Lloyd’s, recalled a client whose handicapped son lived in a “sunken living room,” eight inches lower than the rest of the house. When the neighborhood flooded, $22,000 of medical equipment was ruined. The government refused to pay, calling the living room a basement. Its policies exclude basements.
While the government program insures more than five million homeowners, that is just a small fraction of the number of people who live on floodplains.
Mr. Poulton researched the flood insurance program and eventually found a public report that explained how its pricing worked. The program, he learned, was not using the detailed, house-by-house information on flood risk that is available through satellite imagery and other sources.
That’s because Congress gave the program a legal mandate to work with communities, not individual households. So the program was surveying floodplains, then calculating an “average annual loss” for all the houses there. Its insurance rates were based on those averages.
“It undercharges 50 percent of its risks, and it overcharges 50 percent of its risks, on an equal weighting,” Mr. Poulton said.
Offer a better deal to the households with a below-average risk of flooding — a policy whose price reflects their lower risk — and they will jump at the opportunity to save money on premiums, he said.
But the government does not readily divulge all of its historical claims data, so insurers cannot comb through them and analyze the risks.
“What we know is snippets,” said Martin Hartley, chief operating officer of Pure Insurance in White Plains, which offers supplementary flood insurance to homeowners who want more than the government’s $250,000 coverage.
Also, the government relies on mortgage lenders to enforce the rule requiring at-risk homeowners to buy flood insurance. Mr. Poulton said he found that FEMA officials had told lenders that, in effect, they shouldn’t trust private insurance.
Pages from an engineer’s report showing damage to the side and basement of Mr. Clutter’s house. Greg Miller for The New York Times
Mr. Clutter has kept records of the damage to his house and how it was repaired. He sued the National Flood Insurance Program for breach of contract in August. Greg Miller for The New York Times
He went to Washington to complain to program officials.
“We told them their guidelines were bad, bad for consumers,” he said. “We said: ‘They’re only good for you. You’ve got to change them.’ They said: ‘We don’t answer to you. We answer to Congress.’ We’ve been lobbying ever since.”
No one paid much attention until after Sandy, when the program fell deeper into debt with the Treasury. To help fill that hole, Congress in 2012 approved big increases in its premiums. But that caused an uproar when people got their bills. Two years later, Congress rescinded much of the increase.
Then came this season’s hurricanes and the $16 billion bailout.
The Office of Management and Budget sent Congress an updated list of proposals in October, including measures that would remove certain obstacles to private-sector competition. Its plan would open up the data trove to potential competitors and direct mortgage lenders to accept private flood-insurance policies. It would also revoke an agreement that the program’s contractors — including about 70 insurance companies — must currently sign, promising not to compete against the government program.
Some members of Congress — including Democrats like Senators Chuck Schumer of New York and Robert Menendez of New Jersey, whose states have significant flood exposure and bad memories of Hurricane Sandy — are resisting. They say bringing in private insurers would make the program’s troubles worse, because the insurers would cherry-pick the most profitable customers and leave the government with all the “severe repetitive-loss properties.”
Mr. Poulton did not dispute that. In fact, he said that was exactly what should happen.
“We need the N.F.I.P. to be a full participant in this as the insurer of last resort,” he said. That means it would take the high-risk properties that the private insurers did not want, acting like the state-run insurance pools for especially risky drivers.
Some lawyers for aggrieved policyholders think a shake-up might improve things, if it brought accountability.
August J. Matteis, who is representing Mr. Clutter in his lawsuit, said the insurance program had been so criticized by Congress for its borrowing that by the time Sandy blew in, it had instructed contractors to hold the line on claims. They did so with a vengeance. Thousands of people with flood damage from Sandy ended up disputing the government’s handling of their claims.
Long Beach, Mr. Clutter’s town, is on a barrier island off the southern shore of Long Island. When Sandy sent several feet of floodwater washing over it, the piers supporting the Clutter family’s foundation collapsed. Upstairs, floors buckled. Walls cracked.
Mr. Clutter called Wright National Flood Insurance, the Florida company that administers his policy. Wright sent an independent adjuster, who took photos with captions like “structural foundation wall has been washed in” and “piers have collapsed — no longer supporting risk.”
But then, Wright sent a structural engineer from U.S. Forensic of Louisiana who declared that Sandy had not caused the damage.
In 2015, Mr. Clutter happened to catch a “60 Minutes” report on the aftermath of Sandy. It included accusations that U.S. Forensic had falsified engineering reports on other people’s houses.
There were so many disputed claims and questionable inspections, in fact, that the government opened an unusual review process for Sandy victims. Mr. Clutter went through it, but said the government’s offer fell far short of his repair costs. He sued FEMA and Wright Flood Insurance in August.
A car was buried in sand on Long Beach Island, N.J., during Sandy. Lawmakers from New York and New Jersey are concerned that changes in the National Flood Insurance Program could drive up premiums. Luke Sharrett for The New York Times
Michael Sloane, Wright Flood’s executive vice president, said in an email that while the company could not comment on Mr. Clutter’s case, “we are always committed to working with our customers to keep the lines of communication open as we continue working toward resolution.”
U.S. Forensic did not respond to messages.
Mr. Wright, the program director, acknowledged the problems after Sandy but said corrective measures had been taken “so that it doesn’t happen again.”
Much of Long Beach has been rebuilt since Sandy. Small houses like Mr. Clutter’s are being torn down and replaced with bigger ones that sprawl across two lots. Mr. Clutter worries that if insurers, not the government, set the prices, premiums will soar.
“Then, what happens to me?” he asked. “I’m essentially being driven out of my home that I have three mortgages on.”
A version of this article appears in print on November 5, 2017, on Page A1 of the New York edition with the headline: Thousands Hit by Storms Rely on Wobbly Insurance. Order Reprints| Today's Paper|Subscribe
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